DRGs and Process Optimization aka Sigma

The individual who assigns the DRG's in any major hospital is the highest paid administrator in any hospital. DRG's are Diagnostic Related Groups, and these determine how much the hospital gets reimbursed from the Federal Government for patient care. DRG's, as the name encapsulates, are a generalization+. They group minor variations in diagnosis to minimize the complexity of the payment schedule. As time evolved there are several different DRG's, e.g., Medicare, Severity, All Patient Refined, etc. Reimbursements are different by state, and different by risk category, by patient type and by many other variables.

The task of the administrator who assigns DRG's is to know the regulations intimately. What is the letter of the law. That is only the beginning. Their next task is to be able to identify those patient cases where the patient could move into a higher reimbursement DRG following the letter of the law. It doesn't matter if it takes a stretch of the imagination to see how the letter justifies this patient moving into the next payment tier. The administrator watches individual reimbursement disputes carefully, and is careful to make sure that any patient incremented to a higher tier fits within the letter of the law as further codified by settled disputes. Good administrators never willingly break the law. But they would never even consider giving the government the benefit of the doubt in arbitrating a DRG assignment. It's a game, and DRG administrators play the game very well: they play to win. An average or uninspired DRG administrator stays within the boundaries of the Limited Scope: adhering to a very cautious interpretation of the law. The good DRG administrator is constantly probing outside the limited scope, and knows quite well where lies the zone that is clearly out-of-boundary: they follow the court cases and DRG disputes of other hospitals.

As an illustration, a good DGR administrator increases revenue to a hospital by well over 10%. That 10% more revenue on each and every dollar coming into the hospital for the life of the hospital. Take the NPV+ on 10% of a U.S. $100 million revenue hospital over 30 years. It's a lot of money.

Along comes our process optimization+ expert aka sigma expert. They look at the DRG process and find it in shambles. Individuals are using outdated DRG manuals. Individuals are haphazardly coding DRGs. Apparently the same medical procedures at times can get coded with different DRGs. So we do our process optimization magic. We establish uniform procedures and coding structures for all the physicians involved in DRG coding. We decentralize the DRG coding to a hundred different locations, saving on administrative costs (since the doctors can't charge us back for their administrative time). We get a product (DRG-encoded patient records) that is clean and easily consolidated. We take a DRG process that is three months delayed and bring it down to one month.

Success! We took two months out of the DRG coding process. That's a cash flow of U.S. $10 million for 3 months (i.e., we get 2 months for the 1st $10 million, and 1 month for the 2nd $10 million). We don't get $20 million more revenue. Rather we merely speed up the receipt of this revenue (one time) for two months. So the savings from this exercise is 3 months x 5% per annum x $10 million = $132,000. Compare this to U.S. $10 million per annum now lost forever. You now have documented evidence that the lower DRG was at one point considered the right one by the actual physician at the point of care. It doesn't matter if your DRG administrator can now move the DRG reimbursement up to the next higher level. The deposition will be in the mail tomorrow. You've hard-coded your evidence and you don't get a second shot.

What's wrong with process optimizers? They often don't know the business their supposed to be optimizing. And it's the customer's responsibility to know if this Sigma approach I have is appropriate for their operations. I gave no false pretenses about my being a DRG expert and shame on them for not knowing any better. After all it's the customer's responsibility to know their business isn't it?

We train the client's staff in Sigma techniques just for this purpose. But the staff we train are often just as clueless within their own companies. They are typically smart folks in their field (e.g., Information Technology) but most often don't know beans about the processes they are purportedly optimizing (e.g., R&D). And they can often be folk who revel in the superiority of knowing something you don't know.

Further Reading